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Expanding Our View
By Norm B. Finlinson, Ph.D.
"... Education is so important that we should be doing all we can to help people make the most of their lives."
 Students begin an educational experience with diverse levels of comprehension about the consequences of academic decisions. Counselors, particularly financial aid advisors, can assume a special role if they endeavor to entreat and to impart general processes of long-term planning and specific principles associated with independent decision making. While it is true that effective advisement translates into more pragmatic use of academic resources, it is also true that better use of academic resources results in greater efficiency and less cost for a student. A reduction in the costs of education suggests a diminished possibility that students will incur unnecessary or excessive education loan debt.
The purpose of this article is to advance a new vision of expanded financial aid counseling services that is being practiced at Brigham Young University. The program is designed to teach strategies that anticipate outcomes and to better utilize personal financial resources in pursuit of academic goals. The documented success of such an approach should underscore the importance of finding better ways to integrate more areas of personal student counseling.
The financial aid community has long been experiencing a metamorphosis, transforming, over the last twenty years, from a position of relative obscurity on campus to one of prominence in the assiduous enterprise of regulating institutional enrollments and helping individual students persevere to graduation. In the course of fulfilling the institutional mandate to process applications, package and award financial aid, and maintain strict compliance with federal regulations, the financial aid office routinely neglects a greater opportunity to teach the individual, even though educating has not traditionally fallen within the purview of student aid. Yet, of all partners involved in the management of institutional enrollments, the student aid office is best positioned to equip students with a basic understanding of the ramifications of personal financial decisions.
College students today face tremendous economic challenges. Circumstances force many into negotiating complex financial issues equipped only with familial experience, personal insight, or advice from well intentioned but untrained peers. The capacity to effect good decisions regarding personal finances can constrain erratic or excessive financial behaviors, but uninformed financial decisions can have an enormous negative impact on an individual's life. While some students do carefully consider consequences prior to encumbering future resources, many display neither the background nor the vision necessary to make competent, long-term financial commitments.
The new economic reality is characterized by a generation of students who have more financial resource available to them, in the form of money and credit, than ever before. A sustained economy over several years has encouraged lending institutions to significantly broaden access to credit. In 1997 three billion credit cards solicitations were mailed to potential customers, many of which were targeted to the 18-to-25-year-old population. The average American adult last year received 17 credit card solicitations through the mail. Even with a response rate of only 1.9 percent, the total number of credit cards in circulation increased by 39 million to over 400 million.
Because research by the American Bankers Association shows that consumers remain loyal to the institution that provided the first credit card, more high school students are being singled out for credit card marketing. Some students, not yet 18 years old, are offered special teen cards with a credit limit capped at $500 or $1,000. In order to be complete, the application requires a parental signature promising to cover charges if the card holder defaults. However, the card remains in the student's name and control, and the student can exercise complete freedom to access the line of credit without parents' consent. Card companies generally contend that their goal is to teach teens to use credit wisely in a controlled environment.
According to a 1998 study conducted by Nellie Mae Inc., almost two thirds of all undergraduate students now possess credit cards. One fourth of those students acquired their first credit card while still in high school, and another 55 percent obtained their initial credit card during the first year of college. Undergraduate students carry an average balance of $1,879, and 27 percent retain four or more credit cards. According to a similar study sponsored by the Institute for Higher Education Policy, one in five students indicated that the credit card has been used to pay for tuition and fees at some time. (Note: not all institutions allow payment of tuition and fees with credit cards). Fifty-seven percent have charged books and supplies. Students reported that, on average, 22 percent of their credit card balance represents direct educational expenses, 44 percent is daily living expenses, and 24 percent represents occasional major purchases. The findings from these studies suggest that the use of credit cards to pay expenses associated with a formal educational experience is quite routine.
Another focus of research sponsored by the Institute for Higher Education Policy was to examen the relationship between credit cards and student loans. The data revealed that approximately one half of the respondents reported having student loans. Of those loan recipients, 50 percent possess one to three credit cards, and 15 percent have four or more. While these figures closely resemble those of non-loan respondents, loan recipients are more likely to carry-over a monthly balance, 51 percent compared to 31 percent. Even though some non recipients of student loans use credit cards and some student loan borrowers do not use credit cards, 33 percent of those responding to the survey reported the use of both sources of credit. Either source of debt independently has the potential to financially incapacitate an individual, but a combination of the two can be economically lethal.
Federal budget concerns have severely limited the growth of grant funds available to students. The College Board reports that while appropriations for federal grant programs have grown modestly over the last decade, average federal grant awards, in real dollars, have actually declined. Even as federal grants have abated, the cost of tuition has increased at a rate that has exceeded the annual rate of inflation. The maximum Federal Pell Grant now covers approximately one third of the cost of attending a public four-year college and about one seventh of the cost of enrolling at a private four year college. In the late 1970s a maximum Federal Pell Grant would have covered almost three quarters of the cost of attending a public four-year college and almost one third of the cost of attendance at a private four-year institution.
The impact of a widening gap between accelerating college costs and personal income has been most keenly felt by those who are least able to pay for college. A recent statistic from the College Board, appearing in the October 19, 1999, edition of USA Today, revealed that for the 1979-80 academic year, the average cost of education at a public four-year institution consumed an amount equal to 39 percent of the average income of low income families. In the 1999-00 academic year, that percentage has escalated to approximately 61 percent.
The booming alternative loan business has responded to a seemingly constant plea from students, parents, and administrators for more money, quicker. Non-federal borrowing, while representing a relatively small percentage of overall college borrowing, totaled $2.4 billion in 1998-99, a 25 percent increase over the previous year. In the last four years the amount of private funds available to students has nearly doubled, even though interest rates and origination assessments generally are less attractive than their federal counterparts. With many private loans, need is no longer a significant component, maximum limits occasionally exceed a reasonable cost of education, and eligibility rules are so generous that almost any student can qualify regardless of academic performance. Major investments in technology have reduced the time and effort required to originate and deliver these funds to students. In fact, Internet processing scenarios, at various stages of implementation, will all but eliminate any routine personal interaction among student, lender, and financial aid office, further alienating student loan applicants from the practical exercise of justifying the need to borrow.
Student budgets are constructed on what students spend, versus what they should spend. While students have very little control over the amount of tuition that is assessed, lifestyle decisions contribute significantly to the overall cost of education. Students commonly confuse needs and wants. Rather than prescribe a moderate standard of living, through the establishment of an institutional cost of education, many schools defer to the individual, through student inquires, to define an appropriate budget. The student budget plays a critical role in the establishment of financial aid eligibilities.
All of these conditions have contributed to the reality that borrowing has surfaced as the dominant method of funding post-secondary education. Estimates now suggest that loans represent approximately 60 percent of the total annual student aid that is awarded. Unlike other participants in the contemporary lending enterprise, student loan recipients are generally not required to provide evidence of credit worthiness, encumber personal collateral for the duration of the loan, or even commit another individual to a secondary fiduciary position in order to secure loan approval, creating an artificial borrowing environment that has the potential to accelerate the process of debt accumulation.
In order to understand, in part, why students are becoming so encumbered with debt, one only has to study some of the demographics of today's college students. According to the U.S. Department of Commerce, the percentage of undergraduate students 25 year of age and above has risen from 1 percent in 1970 to 21 percent in 1996. The shift, in part, can be attributed to the fact that students are taking longer to complete a four-year degree. The National Center for Education Statistics reports that in 1977, 45 percent of college students were completing a four-year degree in four years or less after high school. In 1993 that figure was reduced to 31 percent and the percentage of students requiring more than six years to complete a bachelor's degree had increased to 25.6.
While resource is more accessible, information on how to manage it remains extremely scarce. The National Council on Economic Education reports that on a 1998 nationwide examination, designed to assess the level of personal economic literacy, the majority of test takers failed to demonstrate even a basic understanding of concepts of personal finance. The average score achieved by adults was a dismal 57 percent, while high school students scored an average of 48 percent. The National Council, who had previously tested high school students in 1988, observed "no noticeable improvement." The Council also reports that only 13 states currently mandate the inclusion of a course in basic economics in the high school general education curriculum, and only two states require high school students to successfully complete a course in personal finance.
Similar results have been encountered in research sponsored by other groups. In 1997 the Jumpstart Coalition for Personal Finance Literacy conducted a study in which they surveyed 1,532 high school seniors from 65 schools throughout the United States in the areas of personal income, spending, saving and investing, and money management. With an average score of 57 percent, the research suggested that high school students, by and large, lacked the fundamental skills for sound personal financial management. A more disturbing revelation from that study suggested that "experience in managing one's finances does little, if anything, to improve financial literacy, even in areas directly affected by that experience." The report postulates that "experience, unaccompanied by some type of broader theoretical or contextual education, may be worse than no experience at all because it often misleads young people about financial relationships that they will encounter when they are on their own." Contrary to what one would expect, there was very little variation in the survey results based on stratification of parental income. In fact, scores were somewhat lower for students whose parents were in the top income bracket than those in the second most affluent category, suggesting that students who are most likely to pursue post-high school educational endeavors are equally at risk.
A recent survey conducted by the Consumer Federation of America concluded that 78 percent of college juniors and seniors didn't understand that the best way to determine the cost of a loan was to look at the interest rate. Research at Brigham Young University revealed that 66 percent of the students surveyed admitted that any personal financial acumen that they possessed was self acquired through observation or experience.
At a time when the financial aid industry should be dedicating a significant creative effort to identify methods to help individual students understand and better manage their personal finances, including student loan debt, we find ourselves engaged in a campaign to catalog every conceivable way for students to take advantage of their access to both public and private sources of credit. We tacitly defer to the notion that students possess the maturity and experience sufficient to make their own independent financial decisions. This invalid postulate is allowing a generation of college students to become increasingly encumbered with excessive debt, but an even greater travesty is our inability as a profession to respond effectively to this predicament. Much like a discussion of the weather, everyone talks about it but no one does anything about it.
Staggering student loan debt combined with a perception of widespread personal economic illiteracy among our students has raised a concern about our conventional role as facilitators of student aid and policemen for federal regulators. The gradual, almost imperceptible, realization of the existence of this unique opportunity to provide guidance in an important area of life skill development to our students and impact their ability to make competent financial decisions, should engender a spirit of reevaluation and role redefinition. This revelation must serve as a general wake-up call to university administrators to initiate an industry-wide dialog that will help define an appropriate niche for financial aid professionals in this challenging economic environment.
Even as we continue to clarify our formal counseling relationship with students at Brigham Young University, we have implemented several initiatives that suggest a departure from the traditional mission of a university financial aid office. Four years ago, sensing a need to provide greater counseling and educational support to students regarding personal finances, we embarked on a program to reorient our counseling staff. As a result of that effort, accredited financial counselors are available to help students develop long-term educational financing strategies that should eradicate unnecessary or excessive student loan debt.
Concern over student debt levels at BYU has been the motivation for the development and implementation of an obligatory planning process for applicants who contemplate long-term borrowing. "The Financial Path to Graduation" is a seven-step procedure that encourages students to anticipate and plan for an entire academic enterprise. The process starts with the formalization of an academic plan. Applicants are encouraged to consult with counselors, mentors, or others who can assist in the development of a realistic academic prospectus. The "Path" then requires the participant to learn and exercise several basic principles of personal finance in order to determine a level of borrowing that is appropriate for the student's academic ambitions. The data is then submitted to the Financial Aid Office by the applicant via the Internet, eliminating the need for document exchange. All new freshman applicants are supplied with a "Financial First Aid Kit." Included in this packet is a workbook and a 30-minute video, developed by the Financial Aid Office, that outlines the process and provides instruction on how to access the Internet.
The "Path" has been operational for three full processing years. Prior to full deployment, it was made available to students on a voluntary basis. Instruction in the use of the program was incorporated into the entrance counseling curriculum, but very few students took advantage of it. At the conclusion of the first year of implementation it was decided that compulsory use of the program was warranted for all long-term loan applicants. At that point a systems adjustment mandated submission of the planning data prior to final certification of the long-term loan.
Uncertain about off-campus access to the Internet and anticipating a significant negative student response to a new mandatory financial aid procedure, we braced for the worst. The procedure was overridden for a few students who professed an inability to access the Internet from off campus. Those applicants for whom this process was waived were required to complete the online exercise after their arrival on campus. That first year we had in excess of 8,000 students complete the planning exercise over the Web. With new borrowers over the last two years that figure has almost tripled. In subsequent processing years applicants are required to update the original plan before certification of additional loans. While there were some students that first year who expressed written objection to the financial aid office (approximately 35), the majority completed the process without formal complaint. There were some students who even expressed appreciation for the exercise, and even more parents of students who expressed appreciation for it.
After closely monitoring the application, we ascertained that the average time to complete the plan online was about 14 minutes, and in subsequent research it was concluded that students easily understood the process. A survey of applicants revealed that the exercise had a tendency to heighten student awareness of the responsibility of incurring (more) debt. Even though 50 percent of those who responded to the survey reported that the exercise was viewed as another "hoop to jump through," they also indicated that knowing the future effects of debt did have a tendency to cause them to be more careful in their spending, in their accumulation of debt, and to influence them regarding whether or how much to work.
Heightened overall awareness of the effects of student loan debt is certainly a laudable accomplishment; however the greatest success has been to establish the capacity to identify individual students whose levels of borrowing or projected borrowing suggest possible difficulty in amortizing student loan debt after graduation. This capability allows counseling teams to isolate those borrowers who unwittingly forecast excessive debt and provide intervention in order to help students develop realistic financial strategies. It also encourages the financial aid administration to focus finite counseling resources on the areas that demonstrate the greatest need.
Individual counseling sessions, with an accredited financial counselor, provide the student with the opportunity to be instructed in a range of personal finance issues, much broader than student loan borrowing. Experience to date suggests that the counseling sessions are more comprehensive and, therefore, longer than traditional financial aid interviews. We have also found that students, motivated by personal interest, are more prone to seek multiple consultations and invite spouses, family members, and other interested parties to participate.
The research that will help to evaluate the long-term impact of this planning emphasis is now being designed. Initial indicators, however, imply that efforts to teach students about the consequences of taking on debt are having an effect. While the national trend in student loan borrowing continues to increase, in the last two years the number of students borrowing at BYU has decreased by over 27 percent with no significant increase in the amount of grant money available to students and no increase in the number of delinquent student accounts at the university. The average indebtedness for graduating seniors at BYU has decreased by 4 percent from a year ago, suggesting a trend toward less overall student loan debt. Initial information from the U.S. Department of Education indicates that the university's 1999 cohort default rate has been reduced by over 50 percent, from the1997 rate of 1.6 to a preliminary rate of 0.7 percent.
In combination, these indices provide clear evidence that there is justification for expanding the traditional role of the financial aid counselor, at least at BYU. Other institutions and certainly leaders in the financial aid community may want to reconsider the best long-term utilization of student service resources by redefining the term "Student Aid."
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